Tag Archives | payables

Standard Chart of Accounts

In accounting, a standard chart of accounts is a numbered list of the accounts that comprise a company’s general ledger. Furthermore, the company chart of accounts is basically a filing system for categorizing all of a company’s accounts as well as classifying all transactions according to the accounts they affect. The standard chart of accounts list of categories may include the following:

The standard chart of accounts is also called the uniform chart of accounts. Use a chart of accounts template to prepare the basic chart of accounts for any subsidiary companies or related entities. By doing so, you make consolidation easier.

Organize in Numerical System

Furthermore, a standard chart of accounts is organized according to a numerical system. Thus, each major category will begin with a certain number, and then the sub-categories within that major category will all begin with the same number. If assets are classified by numbers starting with the digit 1, then cash accounts might be labeled 101, accounts receivable might be labeled 102, inventory might be labeled 103, and so on. Whereas, if liabilities accounts are classified by numbers starting with the digit 2, then accounts payable might be labeled 201, short-term debt might be labeled 202, and so on.

Number of Accounts Needed

Depending on the size of the company, the chart of accounts may include either few dozen accounts or a few thousand accounts. Whereas, if a company is more sophisticated, then the chart of accounts can be either paper-based or computer-based. In conclusion, the standard chart of account is useful for analyzing past transactions and using historical data to forecast future trends.

You can use the following example of chart of accounts to set up the general ledger of most companies. In addition, you may customize your COA to your industry by adding to the Inventory, Revenue and Cost of Goods Sold sections to the sample chart of accounts.

SAMPLE CHART OF ACCOUNTS

Refer to the following sample chart of accounts. Each company’s chart of accounts may look slightly different. But if you are starting from scratch, then the following is great place to start.

People, myself included, are generally more hesitant with taking credit cards for business on anything major… and I don’t blame them! There’s typically a 2% charge on sales. However, if you use your credit cards the correct way, it may be worth considering. To save you time and risk, here’s a few things that we learned from using a credit card in a business, and maybe you can, too.

Benefits of Taking Credit Cards

Why are credit cards useful in your company? Credit cards serve several purposes. At The Strategic CFO, we only cut a few checks per month due to the power of credit cards. Our accounting is automated, we experience a boost in productivity, and depending on your business, you might even free up enough liquidity to take advantage of discounts on payables.

Experience a Boost in Productivity

Daily sales outstanding (DSO) is a calculation used by a company to estimate their average collection period. The higher the DSO, the more problematic for a company because your liquidity is tied up in receivables. For example, let’s say you’re a plumber and your average DSO is 45 days. By accepting credit cards as payment, you could potentially reduce your average DSO from 45 days to 15 days… maybe less than that! An extra 30 days’ worth of liquidity can drastically improve a company. If a company averages sales of $2,000 a day, that’s almost $60,000 in your pocket earlier than it would have been! So what will you do with that extra cash? Now, you can pay off bills, invest the money, or take advantage of discounts on payables.

Take discounts on your payables

Certain vendors provide a discount on payables if you pay early. 2/10 net 30 is a popular discount given on payables. Specifically, you can get a 2 percent discount for a payment to a vendor in 10 days, or pay the full amount in 30 days with no discount. This reflects well on your supplier-consumer relationship, because the sooner you have your cash, the sooner they have theircash.

They’re a Good Source of Funding

It is recommended that you use a credit card when you need less than $50,000 and you cannot get a bank loan. One of the biggest benefits of having a credit card is that it is a flexible source of funding. You can buy as little or as much as you need, but only have to pay back a small amount monthly. Used responsibly, it can help establish your business’s credit as well making that next loan a little easier to get.

Dell

One of the best examples of how accepting credit cards can be a game-changer is Dell Computers. Back in 1984, when computer sales were gradually picking up pace, Michael Dell operated a computer-building business in his dorm room. He was funded $1,000, but how was he supposed to fund the rest? He strategically used the credit card cash to cover the expenses. Dell would take orders over the phone, gather the credit card information from the clients, and then make the computers. As a result, his cash conversion cycle was negative! This is one of many success stories for businesses who use credit cards as a source of funding.

Consequences of Credit Card Usage

So we’ve highlighted the benefits of taking credit cards, but be wary. Credit cards are still not universally accepted due to a few reasons. Not all businesses can take credit cards; in fact, some might have to pay more fees than others to even accept them. Here are just a few more reasons why people should be careful when taking credit cards for business…

Let’s say the bulk of your sales are via credit card. If you want to stay in business, your gross profit must be substantial enough to cover the credit card fees. In this case, certain industries should not accept credit cards.

General Contract Work

Contract work such as painters, plumbers, and music teachers make only 3-5% of gross profit. Taking 2% of sales with credit would be too much. That would mean waiting on the customer to receive majority of gross profit. This can affect every other aspect of your business… especially overhead.

Real Estate

Another example of an industry where credit cards don’t make sense is real estate. There tends to be a 10% net operating income within the industry. If you’re generating 10% net operating income, it will hurt your business to have 2% credit sales. Taking a 2% hit would cut the investment down by 20%, which is why you sometimes can’t pay large sums (like rent) with credit cards.

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Some properties do accept credit cards, but those tend to be the higher-end properties. Like suppliers, the landlords usually pair the early payments with benefits like points or discount on rent.

Where’s My Money?

And of course… waiting for customers to pay, and depending on the customers’ credit terms, is an issue with accepting credit cards. Credit cards come with all sorts of issues technologically that are out of your control. If credit cards are canceled or stolen, that ultimately affects your automation system. Make sure you have a system in place when accepting a customer’s card, whether it be a contract or a secondary source of funding from the customer. Always be prepared for something to go sideways.

Conclusion

In conclusion, accepting credit cards in a business (no matter how big or small it is) is a risk. Then again, what new business decision doesn’t come with a risk? Like most decisions, it’s just a matter of preparation, research, and credibility. There are many contingencies associated with credit cards such as customer responsibility, and making sure your company generates enough gross profit. Conversely, there are benefits of taking credit cards such as discounts on your payables and a boost in productivity. Make sure to do your research, and be prepared for change.

Trade Credit Definition

The trade credit definition refers to postponing payment for goods or services received. Another trade credit definition is buying goods on credit, or extending credit to customers. It is also receiving goods now and paying for them later. And trade credit is delivering goods to a customer now and agreeing to receive payment for those goods at a later date. Trade credit terms often require payment within one month of the invoice date, but may also be for longer periods. Most of the commercial transactions between businesses involve trade credit. This type of credit facilitates business to businesstransactions and is a vital component of any commercial industry.

If a consumer receives goods now and agrees to pay for them later, then the consumer purchased the goods with trade credit. Likewise, if a supplier delivers goods now and agrees to receive payment later, then the sale was made with trade credit. There are two types of trade credit: trade receivables and trade payables. Trade credit payables and receivables can become complex. It is important to manage trade credit properly and accurately.

Accounting Trade Credit

For accounting trade credit, the value of goods bought on credit is recorded on the balance sheet in an account called accounts payable, representing money the company owes for goods it already received. These are trade payables.

Trade credit is essentially a short-term indirect loan. When a supplier delivers goods to a buyer and agrees to accept payment later, the supplier is essentially financing the purchase for the buyer. Trade credit is an interest-free loan. As long as the buyer postpones payment, the buyer is saving the money that would have been spent on interest to finance the purchase with a loan. At the same time, the supplier is losing the interest it would have earned had it received the payment and invested the cash. Therefore, the buyer wants to postpone payment as long as possible and the supplier wants to collect payment as soon as possible. That is why suppliers often offer discount credit terms to buyers who pay sooner rather than later.

Leslie wants to make sure her business is being paid on time with her competitors. This gives her the expectable cash cycles required to maintain a competitive edge. Simply, Leslie wants to know her days payable outstanding. She first asks the question “what is days payable outstanding?”

Leslie contacts her CFO and requests the answer to her question. Recently, she has become aware of the importance of financial ratios in commerce. Though Leslie is not an accountant she wants to make sure that she is in control of the success of her business, and sees an understanding of her financials as one of the many aspects to this.

Now it is time for Leslie, as the CEO of her company, to step into action. She finds an expert in the industry and discovers that 37 days is a good days payable outstanding benchmark. She is pleased with these results.

Leslie can now move on to other tasks in her company. She is confident that with her analytical mind and the help of her qualified CFO growth can occur. For more ways to improve your cash flow, download the free 25 Ways to Improve Cash Flow whitepaper.

Accounts Payable Turnover Calculation

Average Accounts payable is the average of the opening and closing balances for Accounts Payable.

In real life, sometimes it is hard to get the number of how much of the purchases were made on credit. Investors can assume that all purchases are credit purchase as a shortcut. As a result, it is important to remain consistent if the ratio is compared to that of other companies.

For example, assume annual purchases are $100,000; accounts payable at the beginning is $25,000; and accounts payable at the end of the year is $15,000.